Home Capital Group Inc. sold another $250-million in mortgages, closed a financing deal with Warren Buffett's company and tallied its losses from three months of turmoil as it sought to reassure investors Thursday that it is now on more stable footing.
After securing the support of Mr. Buffett – one of the planet's most admired investors – Home Capital showed that depositors are steadily returning to place their money with the company in exchange for elevated interest rates. Still, interim management team and board members said at the annual general meeting on Thursday that the company must overcome several more hurdles before it will be positioned for growth.
Among the challenges are Home Capital's ongoing search for a new chief executive officer and chief financial officer, and its need to stabilize its capital structure at a reasonable cost.
In addition, the company is mulling asset sales or other deals to shore up capital and there are some lingering concerns about the strength of the country's housing market. Even the value of Mr. Buffett's involvement is in question as shareholders expressed concerns over the possible dilution of their shares as Berkshire Hathaway plans to nearly double its investment.
"It is too early to declare victory," Home Capital director Alan Hibben told a subdued crowd in Toronto, adding that the company would seek to slow the shrinkage of the balance sheet and eventually look to grow mortgages again. "However, we've accomplished a lot and look forward to a more stable and profitable future."
Shareholders plied the board with questions about how the company would be reshaped in the coming months. Few new details emerged. It will be up to the new CEO to develop Home Capital's growth plan, and the board is expected to narrow down its shortlist of candidates to one leader in the coming weeks. The recovery will take time – Home Capital is unlikely to reinstate its dividend in the next 12 months as it looks to accumulate capital.
The shareholder meeting was sandwiched between news releases as the company continues to recover from the recent months and reposition its business.
Early in the morning, the lender reported elevated expenses of $233-million before tax were likely to dampen its second-quarter results, which are set to be released in August.
A significant portion of the expenses stemmed from the onerous $2-billion emergency line of credit that Home Capital secured in late April through a deal led by the Healthcare of Ontario Pension Plan. Home Capital said putting in place this lifeline, as well as other incremental costs, resulted in $210-million in increased costs in the quarter.
That financing arrangement was officially replaced on Thursday afternoon with another Home Capital announcement as a $2-billion credit facility provided by Berkshire Hathaway at a slightly lower interest rate was secured. Home Capital's intention is to use this as a backstop while funding operations through its deposit base of Guaranteed Investment Certificate (GIC) and high-interest savings accounts.
Berkshire Hathaway became Home Capital's largest shareholder when its initial $153-million equity investment of nearly 20 per cent of the company was completed Thursday. The deal required Home Capital obtain a "financial hardship" exemption from the Toronto Stock Exchange because it was not put to a shareholder vote. Berkshire Hathaway's stake could nearly double in the future if shareholders vote in favour of the deal.
Mr. Hibben said the board placed great value on Mr. Buffett's continued and expanded involvement in the company, partially for the protection Berkshire Hathaway could offer in the event of a market downturn or other future crisis. It's "more a question of when it hits the fan next time, would you rather have 38 per cent of Buffett behind you, or 19.9 per cent?" Mr. Hibben said.
Home Capital also included in Thursday afternoon's release that it had struck an agreement to sell $252-million of residential mortgages. The buyer is Alterna Savings & Credit Union Ltd., according to a source familiar with the sale. The deal is expected to close on Friday.
Jaeme Gloyn, analyst with National Bank Financial, recommended in a note to clients that interested investors stay on the sidelines for now. He suggested waiting for better "better visibility" on the health of the Toronto and Hamilton housing markets, the risk that regulators or governments might move to cool the housing and mortgage market, or unfavorable interest rate movements.
In recent weeks, Home Capital's GIC deposit intake has climbed – a key indicator that confidence in Home Capital is being re-established. A the height of Home Capital's turmoil, average daily GIC deposits flowing into the lender dropped as low as $4-million in the week ended May 12. On Monday, the company recorded $70-million in deposits inflows.
Mr. Hibben said these volumes aren't likely sustainable, but the balance sheet would be stabilized if the company could consistently record up to $30-million in gross deposits each day.
With files from Clare O'Hara and James Bradshaw